Any construction professional who has been in charge of estimating or tracking a project’s costs in the past years has lost sleep due to material price volatility. You can feel the pinch when an essential building component becomes astronomically more expensive — witnessing simultaneous softwood lumber, steel, concrete, masonry, electrical conduit and insulation price hikes is enough to hit the panic button.
The pandemic was a curveball for the sector. However, no one could have expected building materials would continue to inflate construction budgets years after COVID-19 brought the global supply chain to a standstill.
Why Material Prices Remain High
Construction stakeholders hoped for skyrocketing imported material prices to return to pre-pandemic levels after international borders reopened for trade, but that didn’t happen. On the contrary, they’ve remained elevated since 2020.
Prices reached a historic peak in May 2022, dipped a little in the subsequent months and stayed within a high range throughout 2023. For various reasons, some industry observers predict slight downswings but are mainly pessimistic about prices through 2024 and 2025.
As with everything else, the dynamics between supply and demand are the most influential factors. Demand for new construction has grown faster than the expansion of supply availability.
Inflation has contributed to material price surges as well. Fluctuating energy prices were primarily responsible for the eye-watering inflation rate in 2022.
The ongoing trade dispute between the United States and China has worsened the situation. Uncle Sam heavily relies on the Asian giant for various foundational building materials and critical machinery. Imposing additional tariffs means sharper price increases for domestic developers and contractors who continue doing business with Chinese suppliers.
The sustainability movement adds insult to injury, too. The cost of energy transition has convinced trend forecasters to inject additional upward pressure on future prices.
Cascading Effects of Sustained Material Price Fluctuations
Higher building material prices may be the new normal due to the above factors. The pandemic was only the first domino to fall — the status quo has hurt construction interests in various ways:
Budget overruns: Industry cost indices can only help construction estimators so much. Wild building material price swings can skew well-thought-out project estimations, causing property owners to get more than they bargained for. Although such a contingency is beyond anyone’s control, severe budget overruns can harm any estimator’s reputation.Project delays: Scarce supply-induced price hikes can result in inconsistent deliveries. Construction work stops without materials. Unreliable lead times can translate into indefinite production holdups, hurting the bottom line of developers, design-build firms, general contractors and subcontractors. Anyone with a no-damages-for-delay clause in the contract may have to absorb the losses.Shrinking profit margins: Construction companies live off notoriously slim margins. Unpredictable material prices can jeopardize any enterprise’s cash flow, which can be an existential threat in a capital-intensive business.Worsening housing unaffordability: Ultimately, consumers must shoulder construction spending spikes. Gaining a foothold in the property market is challenging enough. Prolonged inflationary material prices can render homeownership a pipe dream for many average individuals.Inaccurate property appraisals: Frequent and acute changes in hard costs can give rise to widely dissimilar comps, making appraisers’ lives more difficult. Many builders may deviate from typical home designs and remove some amenities to keep prices competitive. The fewer the local properties with the same features are, the trickier it is to form an expert opinion on the houses’ objective value.
How to Move Forward With Increased Material Prices
Current and future events can cause a permanent shift in construction material prices, so they’re likely here to stay. You have to assume they sustain their upward trajectory — despite showing occasional signs of slowing down — to make long-term adjustments accordingly. Consider these tips to protect yourself from losses due to fluctuating material prices from here on out.
1. Modernize Your Processes
Undergoing technological transformation is more important than ever. You need to leverage various innovations to anticipate and prevent any event that can cause you to procure and use materials needlessly.
Contech can help identify design issues early, boost estimation accuracy, predict budget overruns, eliminate miscommunication and reduce the risk of rework. There’s a long list of technologies you must adopt, but you should prioritize CAD, BIM, predictive data analytics, AR and VR.
2. Explore Alternative Materials
Architects and engineers should think outside the box and explore viable substitutes for commonly used building materials. Being a contrarian can work wonders, reducing your dependence on supplies everybody wants.
Think about more sustainable alternatives to traditional materials. Start with reclaimed wood, recycled steel and repurposed concrete. Look back to the past to rediscover the forgotten, tried-and-true options contemporary construction methods ignore. Adobe, bamboo, cob and straw bale are incredibly renewable examples.
Many emerging products — such as AshCrete, hempcrete and ferrock — aim to replace cement. Swapping concrete for recycled plastic can save money and allow you to build sustainable homes.
Moreover, go modular. Prefabricated building component manufacturers refrain from using materials like lumber — whose prices can explode by more than 200% in one year — and fabricate reusable products, such as vinyl panels, metal structural frames and gypsum boards.
The beauty of modules is efficiency because they’re fast to produce and conserve material. A word of caution — avoid treating modular construction as an afterthought. Incorporating it in the design phase helps eliminate last-minute changes and prevents cost overruns.
3. Localize Your Supply Chain
Much of the material price volatility stems from importation. Although many overseas suppliers can offer cheap, high-quality products, they’re prone to disruption due to trade wars, political tensions and changes in international trade policies.
Climate change also negatively impacts shipping routes. For example, extended droughts have affected the Panama Canal’s operations and delayed freight arrivals to the East Coast.
Rethink your supply chain and strive to source locally. It’s more of a requirement than an option when bidding on publicly funded projects, which require you to procure domestic construction materials.
The price of local products is generally steeper than that of foreign ones. Still, the case may be different when sourcing alternative materials, so look for American suppliers who can meet your needs.
Reform Your Procurement Philosophy
Reducing your exposure to volatile imported material prices is easier said than done. Unfortunately, decoupling from them is vital to keeping your operations afloat and profitable. There’s no magic solution to rising construction costs, but following these tips is a step in the right direction.
How Material Prices Are Still Impacting the Industry
